OSFI adds to chorus of caution on rising household debt

High household debt levels in Canada are "potentially a real problem," the country's financial sector watchdog is warning.

High household debt levels in Canada are "potentially a real problem," the country's financial sector watchdog is warning.

"Household indebtedness relative to income is likely to remain near record levels," and households have less ability to absorb a major shock than they did a decade ago, Mark Zelmer, deputy superintendent at the Office of the Superintendent of Financial Institutions, said in a speech Thursday.

Banks and mortgage lenders need to be careful because the houses that they are counting on as collateral might not keep their value if the economy were to take a serious turn for the worse, he added. "Whether you believe or not that housing prices are too high, you do not hear many observers arguing they are low," he said.

His cautionary note comes at a time when the top officials in Ottawa are sending out fewer alarm bells about the risks posed by the housing market and overextended consumers.

"The news in the speech was not what was said, but who said it," said Benjamin Tal, an economist at Canadian Imperial Bank of Commerce. "What was unusual was the fact that it came from OSFI. This message was basically almost cut and paste from speeches by [former finance minister] Jim Flaherty or [former Bank of Canada governor] Mark Carney. OSFI is taking the role of being the one to warn people."

Verbal warnings about the dangers of excessive mortgages and other debts were one of the key tools that Flaherty and Carney used in an attempt to head off a crisis. They repeatedly told Canadians to get their debt levels in check, spoke about their concerns relating to the housing market, and noted that low interest rates would not last forever.

The new Finance Minister and central bank Governor have struck a different tone. Earlier this week, Finance Minister Joe Oliver reiterated his belief that there is no housing bubble in Canada, and he has said that he thinks the market is on track for a so-called soft landing and suggested he does not intend to intervene in the market.

Bank of Canada Governor Stephen Poloz told a Senate committee at the end of April that, while the housing sector could pose a serious risk if the economy deteriorates, he is expecting the household debt-to-income ratio to stabilize and he too has said that he foresees a soft landing in the housing market. Poloz also said that, anecdotally, there appeared to be an increased awareness among Canadians of the risks.

"Consumers are showing responsibility; for example, home buyers who opt to buy less house than they qualify for so they don't find themselves overextended if interest rates rise."

Oliver said that he was keeping a close eye on the market after banks cut mortgage rates, and the Bank of Canada has continued to highlight worrisome areas such as Toronto's condo market in its publications. But direct warnings to consumers have subsided.

Zelmer, in his speech, is resurrecting the more cautionary tone of years past. While the rate of growth in household credit has slowed to about 4 percent per year, income growth is likely to remain moderate in the coming years, he said.

Finn Poschmann, vice-president of research at the C.D. Howe Institute, which hosted Zelmer's speech, said he welcomed the message. Mortgage delinquencies are extremely low, average credit scores of mortgage borrowers are very high, and housing prices seem to have stopped their relentless rocket upward, he said.

"There are all sorts of nice calm and positive things about the market and how it's functioning," Poschmann added. "And Zelmer's comments seemed to say, 'Beware of complacency on these fronts when you're a lender or an insurer.'

"And I think that is an entirely appropriate message, that while there are no symptoms at all of crisis, when everybody is really, really happy, that's when it gets a little bit dangerous and it's something to watch out for."

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